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Second Circuit Upholds Senior Creditors' Rights Despite X-Clause and Criticizes Third Party Insider Releases in Reorganization Plan

August 3, 2005

A Chapter 11 debtor's insiders narrowly avoided a bad result ten days ago when the Second Circuit held equitably moot an appeal by two creditors from a reorganization plan confirmation order approving insider nondebtor releases.  Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), _____ F.3d _____ , 2005 WL 1693838 (2d Cir. July 21, 2005).  The appellants challenged "the now-largely implemented" reorganization plan confirmed by the bankruptcy court without seeking a stay pending appeal.  Id.  The Court of Appeals addressed three key issues:  the plan's reallocation of stock warrants from subordinated creditors to senior creditors under an inter-creditor subordination agreement; nondebtor releases; and equitable mootness.  The decision clarifies Second Circuit law as to at least two of these issues.